An Overview
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With this in mind, it is important to see the liberalization of trade in financial services in the context of an often broader financial liberalization agenda. The purpose of the former is to increase financial market access and remove discriminatory and other access-impeding barriers to foreign competition. By contrast, the chief purpose of the latter is to remove distortions in domestic financial systems—for example, interest rate and capital account controls, directed lending policies, restrictions on intrasectoral activities, and preferential treatment of publicly owned banks—that impede competition and the allocation of capital to its most productive and profitable uses. Financial liberalization can be conceptually divided into domestic financial reform and capital account opening, and a broad literature discusses its appropriate speed and sequencing. In that context, trade liberalization in financial services is part of overall financial liberalization, and in practice, strong overlaps typically occur between the two types of policy reforms.3 Also of note is that the liberalization of trade in financial services is helpful to, but is not a panacea for, modernization of the domestic financial system. Liberalization is desirable because it serves the development needs of the domestic financial system by improving efficiency and resource allocation through healthy competition with foreign providers. A substantial body of literature on the positive relationship between finance and growth4 and on the spillover effects of foreign (particularly bank) entry5 already exists, though there are also preconditions for the success of financial liberalization.6 More specifically, the size of benefits from trade liberalization in financial services depends critically on the market’s attractiveness (the “if you build it, will they come?” argument). Equally important are complementary regulatory reforms, such as the adoption of international prudential standards, the elimination of financial repression measures, and the strengthening of the financial infrastructure, which includes—among other things—accounting and auditing standards, payments and securities settlement systems, corporate governance frameworks, and creditor rights and insolvency regimes. Hence, neither the liberalization of trade in financial services nor financial liberalization implies the complete deregulation of the domestic financial system. Quite the contrary, stronger regulatory and supervisory frameworks are key complements to market-opening measures in that they preserve the integrity and stability of the financial system.7
The Multilateral Framework for Trade in Financial Services The WTO’s General Agreement on Trade in Services (GATS) represents the only legally binding framework of rules governing trade in services at